Legal insolvency plays a crucial role when considering legal obligations in times of financial distress and in litigation after a bankruptcy filing. The bankruptcy filing of Sears Holdings Corp. presents a prime example of the importance of legal insolvency and, in particular, the role market evidence of insolvency can play for companies, their insiders, and outside advisers and auditors.

Sears: Insolvent in Plain View

What makes the Sears bankruptcy so interesting is how long its insolvency has been in plain view in the form of financial market evidence. The Bankruptcy Code defines “insolvent” as a financial condition that exists when “the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation." The Delaware Uniform Fraudulent Transfer Act — Sears is a Delaware corporation — defines it similarly, where “[a] debtor is insolvent if the sum of the debtor's debts is greater than all of the debtor's assets, at a fair valuation.”

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